Early Signs of Real Estate Cooling Off

Posted on July 24th, 2013

Over the past week and change, I’ve begun to notice the early signs of an overheated real estate market.

For much of 2013, virtually any property that made its way to market was “pending” within a week, largely due to a lack of supply, coupled with record low mortgage rates and relatively low home prices. This made it extremely attractive to purchase a home.

Typically, properties were shown to prospective buyers a few days after being listed, and final and best offers were due within a week. It was pretty much a slam-dunk.

Many of these properties got tangled up in bidding wars, much to the delight of listing agents and the sellers they represented. And most eventually sold above list, often well above list in fact.

Meanwhile, real estate agents sent out e-mails boasting about how their properties received multiple offers, sold before the first open house, or already had offers before hitting the market.

This environment was the true definition of a seller’s market. Finally, those who had no equity for so many years were able to sell for a profit. Amazing turnaround, to be sure.

The Pendulum Has Swung

But there seems to be a market shift in the works. Perhaps all that euphoria and subsequent greed is coming to a head.

Lately, I’ve seen homeowners listing their properties for way too much money. You can simply eyeball prices and realize they’re too high.

A few months back, list prices were still fairly conservative, which explains why bidding wars ensued and final sales prices were higher than list.

Now, it seems some homeowners are trying to play catch-up to take advantage of the hot market. Unfortunately, they might be too late to the party. Or simply too desperate to break even.

You can’t list your home for significantly more than what recent comps went for, especially when mortgage rates are more than 1% higher than they were when those homes sold.

Well, you can, but don’t expect your home to be pending within a week. And if you list too high, it’d be pretty embarrassing to have to lower the price, especially in this hot, hot market. Or risk the appraisal coming in low.

When it comes down it, as home prices and mortgage rates rise, the pool of eligible home buyers will shrink. It’s an affordability thing. At the same time, inventory will rise as more homeowners look to sell after missing the apex.

No Hard Data…Yet

For the record, I don’t have any hard evidence or data to support my claim at the moment. Why? Because every single metric out there is based on old data, from a month or two ago.

So the good news will continue to pour in for months – but if you look at your local market, you might see what I see. Price reductions, properties sitting on the market longer, and rising inventory.

It’s simple really – when properties begin selling close to all-time highs again (just years after the crisis), and mortgage rates (which were the impetus for the recovery) are significantly higher than they once were, you have to question whether this boom will continue.

Sure, it might not result in a bubble, but I think some homeowners looking to score a tidy profit could be in for a rude awakening, especially if a bunch of them all have the same idea at the exact same time.